Enhanced flexibility to set lending rates for microfinance borrowers will be one of the drivers of revival in profitability for non-banking financial company-microfinance institutions (NBFC-MFIs) this fiscal, rating agency Crisil Ratings said on Monday.
This emanates from the Reserve Bank of India’s removal of the interest margin cap on lending rate under its new regulatory framework for microfinanciers. The other factors that will support an improvement in profitability include reduction in credit cost and increase in permissible household income limit according to the new framework, the agency said in a release.
“These, in turn, will help enlarge the market in terms of target borrowers and geographies, especially in the hinterland. Additionally, the current rising interest rate environment is not expected to impair the profitability of NBFC-MFIs as higher borrowing costs would be offset by steeper lending rates, cushioning net interest margins,” Crisil said.
Krishnan Sitaraman, senior director and deputy chief ratings officer at Crisil, said, “A number of NBFC-MFIs have increased their lending rates by 150-250 basis points in recent months. This provides reasonable headroom to absorb higher borrowing costs. Lenders can also dip into their contingency provision buffer created over the past two fiscals to manage asset-quality challenges, if any, in specific states due to natural calamities or socio-political issues — without material impact on profitability.”
Over the past two fiscals, the annual credit cost of NBFC-MFIs had shot up to around 4-5% because of pandemic-related provisioning. Credit costs were around 1.5-2.0% prior to Covid. With asset quality pressures gradually easing and sizeable provision buffers being created, credit cost is expected to decline to around 2.5-2.8% this fiscal.
In this context, the new RBI framework augurs well for the next phase of growth for NBFC-MFIs. The higher income eligibility threshold and enhanced flexibility to price loans will spur deeper penetration into existing markets and entry into new geographies. That, together with rising demand for loans in rural India, should drive NBFC-MFIs’ credit growth, which is expected at 25-30% this year, the release said.
Poonam Upadhyay, director, Crisil Ratings, said: “One issue that this segment has been facing for some time now is potential over-indebtedness of borrowers. The introduction of a cap on total monthly repayment obligations of borrowers will persuade lenders to tighten the processes to assess borrower indebtedness. That will induce sustainable growth over the long run.”
The new regulatory guidelines also focus on the assessment of household income of the borrower, besides credit assessment. The robustness of the income assessment framework and related policies that NBFC-MFIs will implement in the revised dispensation will remain monitorable, the rating agency said.